Can America Be Fixed?

JAPAN(…..) Political scientist Samuel Huntington, the author of the section on United States in the Trilateral Commission’s 1975 report, used to say that it was important for a country to worry about decline, because only then would it make the changes necessary to belie the gloomy predictions. If not for fear of Sputnik, the United States would never have galvanized its scientific establishment, funded NASA, and raced to the moon. Perhaps a sort of response to today’s challenges is just around the corner, perhaps Washington will be able to summon the will to pass major, far-reaching policy initiatives over the next few years, putting United States back on clear path to a vibrant, solvent future. But hope is not a plan, it has to be said that at this point, such an outcome seems unlikely. The absence of such moves will hardly spell country’s doom. Liberal democratic capitalism is clearly the only system that has the flexibility and legitimacy to endure in the modern world. If any regimes collapse in the decades ahead, they will be command systems, such as the one in China (although this is unlikely). But it is hard to see how the derailing of China’s rise, were it to happen, would solve any of the problems the United States faces, and in fact, it might make them worse, if it meant global economy would grow at a slower pace than anticipated. The danger for the Western democracies is not death but sclerosis. Daunting challenges they face, budgetary pressures, the political paralysis, a demographic stress, point to slow growth rather than collapse. Muddling through the crisis will mean that these countries stay rich but slowly and steadily drift to the margins of the world. Quarrels over how to divide a smaller pie may spark some political conflict and turmoil but will produce mostly resignation to a less energetic, interesting, productive future. There once was an advanced industrial democracy that could not reform. It went from dominating the world economy to growing for two decades at the anemic average rate of just 0.8%. Many members of its aging, well-educated population continued to live pleasant lives, but they left increasingly barren legacy for future generations. Its debt burden is staggering, and its per capita income has dropped to 24th in the world and is falling. If the Americans and the Europeans fail to get their acts together, their future will be easy to see. All they have to do is look at Japan.

Link: http://www.foreignaffairs.com/articles/138474/fareed-zakaria/can-america-be-fixed

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5 Responses to Can America Be Fixed?

  1. (…..) The greatest danger is one that will not be faced for decades but that is lurking out there. The United States was built on the assumption that a rising tide lifts all ships. That has not been the case for the past generation, and there is no indication that this socio-economic reality will change any time soon. That means that a core assumption is at risk. The problem is that social stability has been built around this assumption — not on the assumption that everyone is owed a living, but the assumption that on the whole, all benefit from growing productivity and efficiency.


    If we move to a system where half of the country is either stagnant or losing ground while the other half is surging, the social fabric of the United States is at risk, and with it the massive global power the United States has accumulated. Other superpowers such as Britain or Rome did not have the idea of a perpetually improving condition of the middle class as a core value. The United States does. If it loses that, it loses one of the pillars of its geopolitical power.

    The left would argue that the solution is for laws to transfer wealth from the rich to the middle class. That would increase consumption but, depending on the scope, would threaten the amount of capital available to investment by the transfer itself and by eliminating incentives to invest. You can’t invest what you don’t have, and you won’t accept the risk of investment if the payoff is transferred away from you. The agility of the American corporation is critical. The right will argue that allowing the free market to function will fix the problem. The free market doesn’t guarantee social outcomes, merely economic ones. In other words, it may give more efficiency on the whole and grow the economy as a whole, but by itself it doesn’t guarantee how wealth is distributed. The left cannot be indifferent to the historical consequences of extreme redistribution of wealth. The right cannot be indifferent to the political consequences of a middle-class life undermined, nor can it be indifferent to half the population’s inability to buy the products and services that businesses sell. The most significant actions made by governments tend to be unintentional. The GI Bill was designed to limit unemployment among returning serviceman; it inadvertently created a professional class of college graduates. The VA loan was designed to stimulate the construction industry; it created the basis for suburban home ownership. The Interstate Highway System was meant to move troops rapidly in the event of war; it created a new pattern of land use that was suburbia.


    It is unclear how the private sector can deal with the problem of pressure on the middle class. Government programs frequently fail to fulfill even minimal intentions while squandering scarce resources.

    The United States has been a fortunate country, with solutions frequently emerging in unexpected ways. It would seem to me that unless the United States gets lucky again, its global dominance is in jeopardy. Considering its history, the United States can expect to get lucky again, but it usually gets lucky when it is frightened. And at this point it isn’t frightened but angry, believing that if only its own solutions were employed, this problem and all others would go away. I am arguing that the conventional solutions offered by all sides do not yet grasp the magnitude of the problem — that the foundation of American society is at risk — and therefore all sides are content to repeat what has been said before. People who are smarter and luckier than I am will have to craft the solution. I am simply pointing out the potential consequences of the problem and the inadequacy of all the ideas I have seen so far.


    The inherent crisis rests in an increasingly efficient economy and a population that can’t consume what is produced because it can’t afford the products. This has happened numerous times in history, but the United States, excepting the Great Depression, was the counterexample.

    http://www.stratfor.com/weekly/crisis-middle-class-and-american-power

  2. For three years economic policy throughout the advanced world has been paralyzed, despite high unemployment, by a dismal orthodoxy. Every suggestion of action to create jobs has been shot down with warnings of dire consequences. If we spend more, the Very Serious People say, the bond markets will punish us. If we print more money, inflation will soar. Nothing should be done because nothing can be done, except ever harsher austerity, which will someday, somehow, be rewarded. But now it seems that one major nation is breaking ranks — and that nation is, of all places, Japan. This isn’t the maverick we were looking for. In Japan governments come and governments go, but nothing ever seems to change — indeed, Shinzo Abe, the new prime minister, has had the job before, and his party’s victory was widely seen as the return of the “dinosaurs” who misruled the country for decades. Furthermore, Japan, with its huge government debt and aging population, was supposed to have even less room for maneuver than other advanced countries. But Mr. Abe returned to office pledging to end Japan’s long economic stagnation, and he has already taken steps orthodoxy says we mustn’t take. And the early indications are that it’s going pretty well. Some background: Long before the 2008 financial crisis plunged America and Europe into a deep and prolonged economic slump, Japan held a dress rehearsal in the economics of stagnation. When a burst stock and real estate bubble pushed Japan into recession, the policy response was too little, too late and too inconsistent. To be sure, there was a lot of spending on public works, but the government, worried about debt, always pulled back before a solid recovery could get established, and by the late 1990s persistent deflation was already entrenched. In the early 2000s the Bank of Japan, the counterpart of the Federal Reserve, tried to fight deflation by printing a lot of money. But it, too, pulled back at the first hint of improvement, and the deflation never went away. That said, Japan never had the kind of employment and human disaster we’ve experienced since 2008. Indeed, our policy response has been so inadequate that I’ve suggested that American economists who used to be very harsh in their condemnations of Japanese policy, a group that includes Ben Bernanke and, well, me, visit Tokyo to apologize to the emperor. We have, after all, done even worse.


    And there’s another lesson in Japan’s experience: While getting out of a prolonged slump turns out to be very difficult, that’s mainly because it’s hard getting policy makers to accept the need for bold action. That is, the problem is mainly political and intellectual, rather than strictly economic. For the risks of action are much smaller than the Very Serious People want you to believe (…..)

    http://www.nytimes.com/2013/01/14/opinion/krugman-japan-steps-out.html

  3. Professor Uziel Nogueira says: Prof K raises a good point for debate. Japan’s public debt is twice its GDP. At the same time, long term debt can be issued at 1% interest rate. Why does Japan is not punished by markets operators? The answer is two fold. First, Japan’s public debt is financed almost entirely by domestic savers. They are ‘corralled’ by strict regulation laws directing domestic savings to public sector finance. Japanese savers still have a reasonable return on their public bonds. Deflation makes a Yen tomorrow more valuable than a Yen today. Second, Japan is a exporting machine that generates huge foreign exchange surplus with the rest of the world. No danger of running out of foreign currencies to pay debt. The US case is similar to Japan except for the dollar. Public US debt is reaching 100% of GDP and long term debt is issued at low interest rates.


    However, 45% of debt is now financed by foreigners. Here, the mighty dollar plays a fundamental role. The rest of the world is ‘corralled’ in their dollar savings. US debt is the only instrument available to recycle trillions of dollars by central banks, international enterprises and rich individuals worldwide.

    Theoretically, a US debt of 200% of GDP can be financed at sustainable interest rates. It remains to be seen whether a macro economic policy receipt for a Japanese economy suffering stagnation and deflation for a decade will work for a US economy growing at reasonable rates and inflation is very much alive.

    http://www.nytimes.com/2013/01/14/opinion/krugman-japan-steps-out.html

  4. The $116 billion stimulus package unveiled Friday by Japan’s new prime minister, Shinzo Abe, is a step in the right direction for the world’s third-largest economy and America’s fourth-largest trading partner. Mr. Abe’s predecessors in the center-left Democratic Party unwisely followed a course of fiscal austerity, and paid the price for it last month at the polls.


    Mr. Abe’s package of public-works spending (much of it to rebuild the earthquake-shattered Fukushima region), investment tax credits and more spending on education and health care could help jump start the moribund Japanese economy. Stimulus alone, however, will not be enough for long-term revival. Structural reforms will be needed — though it won’t be easy for Mr. Abe’s conservative Liberal Democratic Party to challenge established interests like rural voters and government-dependent banks. But Japan has no other choice after two decades of anemic growth, sapping the buying power of consumers and the competitiveness of its leading companies.

    Japan’s population is aging and shrinking. Debt-laden “zombie” companies are kept alive by infusions of government credit. Too many workers are stuck in obsolete manufacturing industries and too few are available for potential growth areas like energy and health technologies. And with public debt equal to 220 percent of national output, Japan is already the world’s most indebted major economy. The new stimulus package will provide no more than a short-term economic boost at the cost of still more government debt. Mr. Abe may well hope that a temporary boost from these measures will create enough new jobs fast enough to give his coalition the majority in the Parliament’s upper house in elections this July.


    But if he wants to achieve sustainable growth as well, he needs to follow up with a package of structural reforms. These should include provisions for letting zombie companies go bankrupt, phasing out costly agricultural subsidies and raising Japan’s low rates of legal immigration to expand the working-age population.

    Some forward-looking steps, like expanded health care spending, are already in the stimulus package. But not enough. In 2009, reform-minded voters hoped that the center-left Democrats would carry out overdue changes. But squabbling and incompetence in that party brought only more political disappointment and economic decline. The renewed popularity of Mr. Abe’s party could be equally short-lived unless it follows the stimulus package with lasting reforms. (source: Editorial – NYTimes – 14/01/2013)

  5. Japan’s central bank on Tuesday doubled its inflation target to 2 percent, a main pillar in the country’s drastic new strategy to break away from a two-decade economic stagnation. The Bank of Japan’s new commitment, coupled with the government’s splurge of spending on public works projects, represents a controversial rethink about the way developed countries should repair their crisis-battered economies. Under Prime Minister Shinzo Abe, elected last month, Japan has turned away from the well-worn practices followed by economies under duress — conventions that call for austerity and debt reduction. Japan, instead, is trying to spend its way out of a recession, rather than cutting back. The goal is to shake the world’s third-largest economy from two of its most unrelenting problems, chronic deflation and a strong currency, which hurts Japan’s exporters by making their products more expensive overseas. But the strategy represents a particular gamble for a nation already with the highest debt burden in the developed world, at 220 percent of the gross domestic product. If Japan’s public works spending does stimulate the economy, and if the central bank’s monetary easing further weakens the yen, Japan could break from its prolonged slump. Investor confidence would rise, the GDP would grow, and the government would take in more tax revenue to cover its debts. But some economic analysts, noting decades of mismanaged Japanese public spending, fear Abe’s stimulus will help little more than the enormous construction and business firms that support his conservative party. “Spending money is not a bad thing, but [the government] needs a much clearer method of making sure that the money they spend is on high-return projects,” said Robert Feldman, Morgan Stanley’s chief economist for Japan. “No more bridges to nowhere.” Skeptics also note that Japan’s government has no clear plans for deregulation or restructuring — long-term moves that could help the economy after stimulus spending runs out (…..)

    http://www.washingtonpost.com/world/with-2-percent-inflation-target-japan-signals-new-strategy-to-end-deflation/2013/01/22/6ab6d182-6479-11e2-9e1b-07db1d2ccd5b_story.html

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